What is the Role of International Trade in Improvement of World Economies

International/global trade is the exchange of goods between different countries. Naturally, every country has unique crops, expertise, or capabilities depending on their climate, weather, soil fertility, technological advancement, and other factors such as wealth.

International trade is the exchange of goods and services between countries. This type of business gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then lead to a rise in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes

Sourced from:http://www.investopedia.com/articles/03/112503.asp

International/ foreign trade creates an environment where prices, supply & demand are determined by the global economy. External trade is divided into three groups;

  • Export Trade: When a trader from home country sells his goods to a merchant located in another country, it is called export trade. For e.g. a trader from India sells his goods to a trader based in China.
  • Import Trade: When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade. For e.g. a trader from India purchase goods from a trader located in China.
  • Entrepot Trade: When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods. For e.g. an Indian trader (from India) purchase some raw material or spare parts from a Japanese trader (from Japan), then assembles it i.e. convert into finished goods and then re-export to an American trader (in U.S.A)

Sourced from: http://kalyan-city.blogspot.co.ke/2011/03/what-is-trade-meaning-and-nature.html



Entrepot trade is an interesting form of foreign trade as it allows the manufacturer to import raw material; turn it into a finished product and export it into another country. However, although international trade has existed for a long time; it has only become more prevalent recently. Therefore, there are some kinks that still need to be smoothened along the way, but international trade has numerous benefits.


  • International growth

According to the UKTI, there is a possibility exporting companies can achieve levels of growth not possible domestically. Therefore, a company’s sustained revenues from a well-diversified portfolio of overseas customers are vital for a business to benefit.

  • ROI

Business Case Studies asserts overseas trade works to increase financial performance and ultimately augment the returns on investment. There is then potential for businesses to amplify the commercial lifespan of existing products and services, even if they had become less popular in domestic markets.

  • Spreading business risk

Director of Smart Currency Exchange Director Charles Purdy says a company may protect itself from unprecedented global disasters and market upsets such as financial meltdown, earthquakes, and civil unrest through overseas business. The home market of a business could contract or even disappear during these volatile times, but the business may be saved by the revenue it generates overseas.

  • Market competition

If a business competes in several markets, then it may have the ability to thrive overseas, Business Case Studies states. Companies can improve their competitiveness through the observation of a range of trends in quality, product development, design, and packaging.

  • Exchange rates

As a business begins to trade overseas, the reliance it has on its domestic market reduces and risks can be spread, especially in relation to exchange rates according to Business Case Studies. For example, as BCS asserts, if a business does most of its trade in US Dollars it may be beneficial for said business to trade with Japan to spread the exchange rate risk between the Dollar and the Yen, therefore creating benefit for the company.

Sourced from: http://www.europeanceo.com/business-and-management/the-pros-and-cons-of-international-trade/


  • Political changes are a unique risk that can be multiplied with every foreign presence

Political changes are nothing new to the business world. Domestic policy changes can affect the way organizations do business. International trade expands this risk every time a new foreign market is entered. Income streams can be protected, but there is no protection when political change happens and that could create a detrimental business arrangement.

There are cultural risks that must be considered

Not taking into account the changes in culture that occur in foreign markets can be a very costly mistake. Marketing beef in India, for example, could be a fatal mistake for an organization. Even the way marketing is approached for a product can be very different in the West compared to the East. Without an awareness of cultural habits and needs, international trade can do more harm than good.

  • Exchange risks will always exist

Foreign currency fluctuations happen every day. This means the value of existing goods change daily. So does the value of an existing liability. If enough changes occur, a business can immediately become non-competitive because there is less value or more debt involved with their presence in international trade. The end result is a loss of sales, loss of revenue, or a loss of value and it all falls outside of the control of the business.

  • There is a higher risk of not receiving payment for services rendered.

The risks of not being paid for goods or services is often higher in an international trade arrangement than in domestic arrangements. It is necessary for organizations to perform their due diligence before entering a foreign market with other organizations or countries so this risk is mitigated. Having insurance in place or a letter of credit issued may also be necessary.

Sourced from: http://brandongaille.com/8-international-trade-pros-and-cons/

What are Foreign Trade Zones?

Foreign and Free Trade Zones are regions meant to encourage international trade without any barriers, reduced duty or bureaucracy. It is usually a designated location mostly near ports that allows entry of foreign goods to compete with local products.

A foreign-trade zone is a designated location in the United States where companies can use special procedures that help encourage U.S. activity and value added – in competition with foreign alternatives – by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings. All designated sites must be approved for FTZ status by the Foreign-Trade Zones Board, a division of the Department of Commerce.

Sourced from: http://www.theportofchicago.com/operations/ftz.htm

Foreign Trade Zone involves locations of reduced duty and tariffs of foreign goods. On the other hand, free trade zones lacks trade barriers, tariffs, and just seeks to promote trade.

A free trade zone is a designated area that eliminates traditional trade barriers, such as tariffs, and minimizes bureaucratic regulations. The goal of a free trade zone is to enhance global market presence by attracting new business and foreign investments.

Sourced from: https://www.sba.gov/blogs/free-trade-zones-what-are-they-and-how-can-small-businesses-benefit

Free Trade Zones seek to promote global trade by attracting new business and investments. There is a lot of confusion between Foreign and Free Trade Zones, as well as Export Processing Zones. The following definitions will help to clear the confusion;
Generally speaking:

  • Foreign Trade Zone is the term used in the United States. For more information on U.S. foreign trade zones, visit their overseeing body’ the U.S. Foreign-Trade Zones Board.
  • Free Trade Zone is the term used in other developed countries, such as those included in the European Union.
  • Export Processing Zone is commonly used in developing nations.
    The Foreign Trade Zones are locations that allow companies to sell their goods while at the same time avoiding huge taxes and duties.

Sourced from: https://www.sba.gov/blogs/free-trade-zones-what-are-they-and-how-can-small-businesses-benefit

Merchandise of every description may be held in the Foreign-Trade Zone without being subject to Customs duties or other added value taxes. Importers, manufacturers, and distributors can realize cost-savings benefits because normally when foreign cargo lands on U.S. soil it is subject to clearance through Customs and requires immediate payment of U.S. Customs duties. This tariff and tax relief is designed to lower the costs of U.S.-based businesses engaged in international trade, thereby create, and retain the employment and capital investment opportunities that result from those operations. Many firms use Foreign-Trade Zones to defer the payment of duties and taxes, and in the case of re-export of cargo, avoid the applicable duties and taxes altogether as the merchandise was considered to have never entered the US consumption area

Sourced from: http://ftz9.org/about-us/who-and-what-is-a-foreign-trade-zone/

The Foreign Trade Zone (FTZ) decreases the cost of U.S based companies involvement in the foreign trade. The FTZs are found in two categories;



There are two types of FTZs; general-purpose zones and special-purpose subzones. General-purpose zones operate as public utilities providing a variety of services to many users. Special purpose subzones are single-use facilities, which cannot be accommodated within the general-purpose zone.

Sourced from: http://ftz9.org/about-us/who-and-what-is-a-foreign-trade-zone/

The general-purpose zones and special purposes subzones have numerous benefits to U.S traders; the benefits include;

Benefits of an FTZ designated site to the community include:

  • Helping to facilitate and expedite international trade.
  • Providing special customs procedures as a public service to help firms conduct international trade-related operations in competition with foreign plants.
  • Encouragement and facilitation of exports.
  • Helping to attract offshore activity and encouraging retention of domestic activity.
  • Assisting state/local economic development efforts.
  • Helping to create employment opportunities.

Sourced from:http://www.theportofchicago.com/operations/ftz.htm

The FTZs promise to increase employment opportunities while still facilitating global trade. On the other hand, Free Trade Zones also have some benefits as follows;

  • Operating within a country’s free trade zones offers many advantages to importers and exporters
  • Common economic benefits include the deferral or elimination of customs duties, exemption from certain taxes, and inverted tariff relief.
  • Free trade zones also offer operational benefits such as indefinite storage opportunities, increased security and insurance on goods, and top-of-the-line operating facilities.

Sourced from: https://www.sba.gov/blogs/free-trade-zones-what-are-they-and-how-can-small-businesses-benefit

Free Trade Zones eliminate costs such as storage and security problems. On the other hand, Export Processing Zones are special types of FTZs found in developing countries.

An Export Processing Zone (EPZ) is a specific type of FTZ, set up generally in developing countries by their governments to promote industrial and commercial exports.

  • Brazil
  • China
  • Mexico
  • Colombia
  • Philippines
  • Costa Rica
  • India
  • Malaysia
  • Honduras
  • Indonesia
  • Bangladesh
  • Guatemala
  • El Salvador
  • Pakistan
  • Kenya
  • Sri Lanka
  • Mauritius
  • Madagascar
  • All have EPZ programs. In 1997, 93 countries had set up export processing zones employing 22.5 million people, and five years later, in 2003, EPZs in 116 countries employed 43 million people.

    Sourced from: https://en.wikipedia.org/wiki/Free_trade_zone

    What is Trade Policy?

    In the fascinating world of global trade, it is important to know the existing trade policies within your region. The trade policy predetermines the rules of engagement between countries as they engage in international trade.

    Trade policy defines standards, goals, rules and regulations that pertain to trade relations between countries. These policies are specific to each country and are formulated by its public officials. Their aim is to boost the nation’s international trade. A country’s trade policy includes taxes imposed on import and export, inspection regulations, and tariffs and quotas.

    Sourced from:http://www.economywatch.com/international-trade/trade-policy.html

    Trade policy seeks to reduce any conflicts between partner countries that may make international trade difficult. External trade promises to boost the economies of each nation involved in international trade. A trade policy generally focuses on the following specifications;


    Every country has the right to impose taxes on imported and exported goods. Some nations levy heavy tariffs on imported goods to protect their local industries. High import taxes inflate the prices of imported goods in local markets, ensuring that local products are more sought after.

    Sourced from: http://www.economywatch.com/international-trade/trade-policy.html

    • Specific tariffs:

    Are levied as a fixed charge for each unit of a good imported.

    • Ad volorem Tariffs:

    Are levied as a proportion of the value of the imported goods.
    A tariff raises the cost f imported products. In most cases, tariffs are put in place to protect domestic producers from foreign competition.

    Sourced from: http://conveylive.com/a/Trade_Policy_Instruments

    2.Trade barriers

    They are state-imposed restrictions on selling a particular product or with a particular nation. Some of the most common forms of trade barriers are tariffs, duties, subsidies, embargoes and quotas.

    Sourced from:http://www.economywatch.com/international-trade/trade-policy.html


    This determinant ensures that only high-quality products are imported in the country. Public officials can lay down inspection regulations to ensure that the imported product conforms to the set safety and quality standards.

    Sourced from: http://www.economywatch.com/international-trade/trade-policy.html


    A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants, low-interest, tax breaks and government equity participation in domestic and government producers in two ways:

    • They help producers compete against foreign imports and
    • Subsidies help them gain export markets.
    • The primary gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result of them.

    5.Voluntary Export Restraints (VERs)

    A voluntary export restraint is a restriction set by a government on the quantity of goods that can be exported out of a country during a specified period of time. Often the word voluntary is placed in quotes because these restraints are typically implemented upon the insistence of the importing nations.

    Typically, VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.

    6.Local Content Requirements

    A local content requirement is a requirement that some specific fraction of a good is produced domestically. The requirement may be expressed either in physical terms (75% of component parts for this product must be produced locally) or in value terms (75% of the value of this product must be produced locally). It also tends to benefit producers and not customers. They have been used mainly in developing and developed countries.



    7.Administrative Policies

    Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. In addition to the formal instruments of trade policy, govt. of all types sometimes uses informal or administrative policies to restrict imports & boost exports. Some would agree that the Japanese are the masters of this kind of trade barrier.
    As with all instruments of trade, administrative instruments benefits producers and hurt consumers, who are derived access to possibly superior foreign products.

    Anti-dumping policies:

    In the context of international trade, dumping is defined as selling goods in a foreign market at below their costs of productive, or as selling goods in a foreign market at below their “fair” market value. “Fair” market value of a good is normally judged to be greater than the costs of producing that good.

    Sourced from: http://conveylive.com/a/Trade_Policy_Instruments

    The main components of trade policy entails; subsidies, tariffs, anti-dumping rules, and barriers. Trade policy in itself is found in various forms depending on the countries and regions involved.

    • National trade policy: Every country formulates this policy to safeguard the best interest of its trade and citizens. This policy is always in consonance with the national foreign policy.
    • Bilateral trade policy: This policy is formed between two nations to regulate the trade and business relations with each other. The national trade policies of both the nations and their negotiations under the trade agreement are considered while formulating bilateral trade policy.
    • International trade policy: International economic organizations, such as Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO) and International Monetary Fund (IMF), define the international trade policy under their charter. The policies uphold the best interests of both developed and developing nations. The best example is the Doha Development Agenda, which was formulated by the WTO.

    Sourced from: http://www.economywatch.com/international-trade/trade-policy.html